Updated from Feb. 3
Dow Jones Industrial Average
hit uncharted territory Thursday. In the coming week, the stock market moves into uncertain terrain.
After several weeks chock full of scheduled events with market-moving potential, the days ahead feature "less-known knowns" as the earnings and economic calendars downshift a bit.
Earnings season is winding down, though the coming week brings results from
, among others.
Meanwhile, the week includes macro headliners such as the ISM Services Index Monday and fourth-quarter productivity data Wednesday, as well as separate speeches by
Chairman Ben Bernanke, Chicago Fed President Michael Moskow and San Francisco Fed President Janet Yellen on Tuesday, followed by Philadelphia Fed President Charles Plosser on Wednesday.
The Fed speak will no doubt produce some headlines and interesting statements, but will it change anything regarding the market's perception of Fed policy? "Probably not," says James Bianco, president of Bianco Research.
As of Friday, the fed funds future market is "pretty much discounting the Fed on hold as far as the eye can see" -- or at least until a potential ease in late 2007 or early 2008, according to Bianco. "With that said, given the
recent data we've gotten, I don't expect
Fed officials to say anything to change that view."
If anything can change the Fed's mindset, it's the Feb. 21 consumer price index report -- specifically the core data, he says. The Fed has consistently said core inflation is above its "comfort zone," but it expects further moderation going forward, Bianco notes. "If inflation numbers are bad, we're going to move back toward tightening."
But last week's
FOMC statement -- particularly the line "readings on core inflation have improved modestly in recent months" -- led many traders to believe that a rate hike has been taken off the table. After the statement, the stock market rallied on the hopes of a potential rate cut by springtime.
Jim Cramer expressed this view in our
Wall Street Confidential video on Friday, noting strength in rate-sensitive cyclical stocks, weakness in January sales by U.S. automakers and continued concerns about housing, despite the homebuilders' rally Friday following
upbeat 2007 guidance.
Bianco counters with a statistic: The
has gone more than 200 days without a 2% correction, something that has only occurred once before (in 1995) in the past 53 years.
"The stock market for the last seven months has gone in one direction and has not wavered" despite big swings in expectations for monetary policy, he says. "I don't think the stock market is paying attention at all" to the Fed save for "hour by hour" movements following Fed meetings and such.
Rather than the Fed, he believes what's driving the stock market higher is the shrinking supply of stock, as shown in the accompanying chart.
As a result of private equity takeovers, mergers and Sarbanes-Oxley regulation curtailing U.S.-based IPOs, the supply of stock has been shrinking dramatically, a trend that is accelerating in recent quarters. This shrinkage "has the same effect as a 'liquidity surge,'" Bianco says, and is a more important dynamic in the stock market than Fed policy or perceptions thereof.
Stock Supply Drying Up
Source: Bianco Research; Fed flow of funds data
Actions vs. Words
With the Dow hovering around its all-time high, you'd think investors would be ebullient. The latest survey by the American Association of Individual Investors shows bullish sentiment rose to 46.3% from 39.5%, while bearish sentiment dropped from 33.3% to 30.5%.
But actions speak louder than words, and fund flow data show that retail investors are still skeptical about the U.S. stock market. Including exchange-traded funds, domestic stock funds suffered net outflows of $4.1 billion for the week ended Jan. 31, while foreign-based equity funds and ETFs had net inflows of $2.6 billion, according to AMG Data.
The January results are consistent with the pattern set in 2006, when domestic equity funds and ETFs combined had net inflows of $15 billion (U.S. mutual funds actually suffered outflows of $5.8 billion last year), a paltry sum compared with the nearly $143 billion of inflows into foreign equity funds and ETFs.
In other words, U.S. equities are a long way from being in "bubble" territory, while the so-called dumb money remains very much enamored with international equities.
Finally, last Monday saw the
announcement of several relatively small deals and speculation of a few large ones, including
being acquired by
being in the crosshairs of
Bank of America
. By week's end, the former gained some credence amid reports Bristol-Myers has hired investment bankers, but Bank of America
squashed speculation about the latter.
Meanwhile, the $40 billion-plus battle over
Equity Office Properties
is likely to come to an end soon, as the commercial property giant has
expressed a preference for Blackstone Group's bid. Shareholders are expected to vote on the deal Wednesday.
was up 4.5% Friday on speculation that it too is a potential private equity takeover target.
After such speculation, confirmation of any of the above is unlikely to inspire much trading next week. It's the as-yet unknown events that are likely to have the greatest impact.
Take, for example, Friday's sharp decline in copper and zinc prices, reportedly stemming from concern about losses at a London-based hedge fund, Red Kite. Notably, the spring 2006 selloff began amid dislocations in the commodities markets exacerbated by losses at a hedge fund,
Ospraie Management. Commodities weakness then spread into emerging market stocks and eventually developed markets as well.
That's not to say a repeat is necessarily in the offing. But it's usually the things people aren't worried about that creep up to bite investors, who apparently aren't much worried about international markets these days, judging from the fund flows cited above.
Aaron L. Task is editor at large of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.